Identifying and understanding all investment management fees and related costs still mostly elude large asset owners, even though they've been drilling deeper to identify and track them, especially in private equity and other alternative investments, some consultants contend.
“There seems to be ... a relatively poor understanding of the totality of costs being paid,” said William F. Jarvis, executive director. Commonfund Institute, the education and research arm of Commonfund, both based in Wilton, Conn.
Concern over fees is heighted in a weaker market, he added.
“Sure, when market returns are low, obviously 50 basis points in fees as a percentage of a lower (return) is more material than 50 basis points as a percentage of a higher (return),” Mr. Jarvis said.
That focus on fees and costs should always be there, said Peter D. Gerlings, senior vice president, investment solutions at Segal Rogerscasey, Boston.
“Good returns tend to mask a lot of things that otherwise probably could be addressed, “he said.
Recognizing a need to step up attention, a number of asset owners recently have announced plans to better identify and report fees and costs.
Earlier this year, officials of the California Public Employees' Retirement System, Sacramento, acknowledged they didn't know how much the $296.7 billion fund was paying in total to its private equity managers and announced plans to begin identifying and reporting the performance fees it pays to the firms.
And in October, Scott Evens, chief investment officer of the New York City Retirement Systems, whose combined assets total $162.9 billion, announced plans to seek more “more complete and informative fee disclosures” from hedge funds and private equity managers.
To that end, Scott Stringer, New York City comptroller who oversees the systems, called on all private asset managers to disclose their complete historical and current fees and expenses as a condition of their continued relationship.
Private equity fees are a particular problem, said Tom Scheibelhut, managing principal at CEM Benchmarking Inc., Toronto. “Big asset owners have ... a very good handle on all costs except for private equity.”
Brad Morrow, head of manager research for the Americas at Towers Watson & Co., New York, expressed qualified confidence in asset owners.
“Most large asset owners understand costs quite well, generally speaking,” he said. “But of course the more complicated the structures are, the more opaque the language is. Oftentimes there is room for misunderstanding.”
In a paper Mr. Jarvis wrote last month on the institute's website, “Understanding the Costs of Investment Management,” he noted that unlike other factors that affect investment returns, such as asset allocation and the many types of operational and investment risk, costs are almost certainly the least well understood.
“There seems to be ... a relatively poor understanding of the totality of costs being paid,” Mr. Jarvis said in an interview.
Fees can be seen on an invoice, Mr. Jarvis said, and can be measured and compared.
“Costs are frequently either taken out at the fund level and not separately invoiced or they are buried in the structure of the investment management process. ... Many of these types of costs never really come to the attention of ... fiduciaries, and so they may simply be ignored,” he said.
Most endowments and foundations as well as pension funds “have very little in the way of internal staff,” Mr. Jarvis said.
“So who would be the person who would go and achieve that understanding” of fees and costs? They might rely on investment consultants, he added.
“It is probably not in the interest of managers to allocate a lot of time trying to explain costs and fees to their clients,” Mr. Jarvis said. Breaking out costs and fees “could appear to make a manager more expensive compared with a manager that does not. This is not easy work to do. Most managers won't see it in their interest to do it. And many asset owners won't see it as a high priority because of ... higher priorities for their staff.”
